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What is a Price Discount?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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    2003-2016
    Conjecture Corporation
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Price discounts are incentives offered to customers, usually as a means of attracting repeat business from those customers. While the implementation of some type of discount on price will vary from one situation to another, the basic idea is to provide customers with a sense of receiving some type of additional value by not having to pay the standard or published price for goods and services. While many think of a price discount as a tool used mainly by retailers, the fact is that this type of strategy is often utilized to attract business clients and entice them to make long-term commitments to a specific vendor.

One of the more common examples of a price discount to a business or other type of organization is known as the volume price discount. With this approach, a vendor offers the client a discounted rate on each unit purchased, provided the client agrees to generate a certain level of business volume within a given period of time. In some cases, the vendor may also provide some type of discount incentive if the client agrees to promote the provider as its vendor of choice. An arrangement of this type is usually documented with a formal contract, effectively locking in the discounted rates for the client for a period of anywhere from one to five years.

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Using a price discount in this manner is usually beneficial to both parties. For the business that is purchasing the goods or services, the discount earned for volume commitments helps to keep the costs of operation lower, a benefit that ultimately increases the overall profit potential of the company. At the same time, the vendor who provides the discounted pricing under the terms of a contract can reasonably project future cash flow and thus enhance its process of planning for the future. Assuming that no unanticipated events or circumstances materialize that interfere with the ability of each party to honor their responsibilities, both buyer and seller are very likely to be satisfied with the arrangement.

In a basic retail setting, a price discount is sometimes used to move merchandise that is either being discontinued by the manufacturer or has failed to catch the attention of consumers at the currently posted retail price. Here, the idea is to allow the retailer to recoup at least part of his or her investment in the merchandise, since it has become clear that the items will not generate the amount of profit originally projected. Depending on just how much of a price discount is applied to the items, there is a good chance that the retailer will cover basic costs, and possibly make a small amount of profit over the course of the sale.

A retailer may also choose to use a price discount model as public relations or publicity tool. When this is the case, the focus is on offering goods that are popular for a significant discount, if the consumer will purchase other products at regular price. For example, a supermarket may offer a discounted price on a certain quantity of ground beef if the consumer will also purchase a specific brand of hamburger buns. The consumer, who is satisfied with the savings generated by the price discount, is more likely to return to the retailer in future, possibly becoming a loyal customer.

There are those who object to the concept of the price discount. Detractors sometimes cite the fact that by applying a discount to various goods and services, the seller is in effect telling consumers the products are not worth the original unit price. However, many sellers counter with the fact that offering discounts in exchange for building consumer loyalty increases the overall business volume, allowing the seller to generate more in sales than would have been possible otherwise.

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